Get smart about spending, debt and retirement: 5 steps to becoming the boss of your money

Your goal is to tell your money what to do, not let it get away from you on an impulse

Bernice Ross Contributor

Jul 21, 2014

Do you have money for emergencies? Are you funding your retirement and paying cash as you go? If not, you’re like most other Americans, and money is your boss. As REDX’s Michelle Holt puts it, “Money is a terrible master but a wonderful servant.”

Michelle Holt understands money. Before joining REDX as director of marketing and strategic relations, Holt was managing billion-dollar portfolios for Goldman Sachs. At the recent Awesome Females in Real Estate conference in Scottsdale, Arizona, Holt outlined a five-point plan that can put you on the road to true wealth.

What constitutes true wealth? According to Holt, “Wealth is measured in time, not dollars. Wealth is the number of days you can live without working.” While many people are rich, the truly wealthy are those who don’t have to worry about money.

In order to become the boss of your money rather than having money as your boss, Holt recommends that you follow the five-point plan below.

1. Know your financial obligations
The first step in this process is to identify how much you take home each month by taking your 1099 income from your business and dividing it by 12 to achieve a monthly amount.

The next step is to list all of your regular business expenses. Use your Schedule C, your LLC, or your corporate tax return and P&L (profit and loss statement) to make this determination.

You must also determine what it costs for you to live. This includes house payments, electricity, food, water, medical, dental, insurance, etc.

If you are carrying any debt, include the monthly payments segregated by principal reduction, as well as the amount of interest.

Live like no one else now so you can live like no one else later. Remember, money is only a tool. It will take you where you want to go, but you are still the driver.”

Also schedule your savings and tithing as well. An excellent resource for this process is daveramsey.com where you will find budgeting tools plus strategies for coping with your debt.

Now look at your discretionary spending. Where are you spending your money? To become the boss of your money, begin by writing down everything that you spend. Your goal is to tell your money what to do, not let it get away from you on an impulse.

2. Budgeting is an active, not a passive, activity
According to Holt, a major mistake most people make is failing to pay themselves first. Your budget for yourself must include funds for clothing, car, hair, entertainment, cleaning, postage, prescriptions, cosmetics, gas, gifts, fun, etc. Holt recommends that you break these into categories such as your annual beauty fund (shampoo, cosmetics, toothbrushes, etc.), a household fund (soap, detergent, toilet paper, etc.), clothing, car and gifts.

Prioritize this list so you know what must be funded first.

Now here’s the secret to making this work: Label your money for each purpose. If you don’t, it disappears! Holt recommends that when you receive extra money, allocate it based upon the priorities you have established. Remember, every penny you don’t label will probably disappear.

A major money drain can be your bank, especially if it charges for checking or other services. Instead, join a credit union where you are a member.

If you are already good at budgeting, Holt recommends these ninja moves:

First, keep your budget and your expense accounts separate. Each of these accounts will have subcategories much like you have in your business for MLS fees, car expenses, marketing, etc.

Second, automate all accounts payable. This comes out of your expense account and includes house payments, electricity, Internet, cellphones, garbage collection, water, etc.

Third, include your memberships or any other annual fees. Take the annual number and divide it by 12 to obtain the cost per month.

Fourth, start a car fund so you pay cash rather than using financing to buy your next vehicle.

3. Create an emergency fund
Your emergency fund is not an investment — it’s insurance against emergencies. You need a minimum of $1,000-$2,000 that you can access when you face a true emergency such as a fire, accident, hurricane, earthquake, etc. Holt calls this your “sleep well at night” fund. Set it up immediately!

4. Snowball debt — pay yourself by stop paying THEM
Debt is NOT normal. Get in the habit of paying cash rather than using credit. This means that you save for purchases rather than financing them. If you can’t pay cash for it, do you really need it? Remember, every time you spend money it should be mindful.

5. Retirement — know your numbers
If you’re saving for your kids’ education, fund your retirement first. Your kids can get loans for their educations. There are no loans for retirement. This goes back to paying yourself first.

Also, the U.S. Census Bureau says that one-third of the men in the U.S. between the ages of 22 and 34 are living at home. Holt, who is a Gen Yer, says, “Kick them out. You’re doing them no favors by allowing them to live at home, and it’s damaging your ability to fund your own retirement.”

To help you curb your spending, check out the latte factor expense calculator. The little costs really add up. To illustrate this point, a $6 daily latte over five years costs $13,000. Moreover, the $6 spend normally costs $8-$10 in pretax dollars.

To be smarter about managing your retirement account (and investing in general), Holt recommends that you check out the blogs at LearnVest.com and Wealthfront.com to educate yourself rather than just relying on experts.

Holt’s motto for her own life is: “Live like no one else now so you can live like no one else later. Remember, money is only a tool. It will take you where you want to go, but you are still the driver.”